"Unfortunately, at this moment this is the only possible and responsible behaviour," he told the RTL commercial television network in an interview, adding that this would most probably apply to salaries as of April 1.
He said the alternative was layoffs. "The corrections are small and aimed at preserving budgetary stability."
Asked what had changed since Finance Minister Slavko Linic's recent claim that salaries and pensions would not be cut and if the situation was indeed so dramatic, Milanovic said the situation was not dramatic but that projections and plans were not as anticipated by the government and that this called for adjustments.
He said the government would not give up on structural reforms, improving the entrepreneurial climate and adopting a new labour act.
The PM also announced a budget revision, saying that in its first year in office his government had failed to reduce the wage budget as planned, so some corrections were necessary. He said that unlike most European Union countries, Croatia had touched the wage budget "very little."
Milanovic said he expected the 231,000 public-sector employees to understand and show solidarity with those in the private sector and the 350,000 jobless.
He said the state's costs were constantly rising and that the government must stick to its objective not to exceed the HRK 10 billion budget deficit, "not because of the rating agencies but because of our international creditors."
Milanovic recalled that the budgetary deficit was slashed from HRK 15 billion in 2011 to HRK 10 billion.
He said that since the latest Standard & Poor's rating downgrade on Croatia, borrowing costs had stayed the same and relatively favourable compared to early 2011, when his cabinet came into office.
"Without growth, we can't maintain the costs," he said, adding that if the budget deficit was exceeded, the whole system would be brought into question.
Asked what kind of reactions he expected from unions of public-sector employees whose salaries would be cut, Milanovic said he did not expect lawsuits and that this was a political decision that should have been adopted years ago.
"Croatia will remain a country with a very high level of worker protection, above the EU average," he said, adding that he did not fear demonstrations.
Asked what the government would do to generate growth, he said, "We are fighting for every investment. The projects will be launched and I am moderately optimistic."